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INVESTMENT PROPERTIES - GIFTING TO THE NEXT GENERATION


People buy investment properties for a variety of reasons, whether for rental income and/or capital appreciation.


cash, or gift the property to their children. Should the owners opt for gifting the property to their children,there are tax implications to consider which are outlined below.


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Please note the following will be subject to any changes arising from the Budget on 3 March 2021.


Capital Gains Tax The first consideration is capital gains tax (‘CGT’). Any capital gain between the market value of the property at the date of gifting and the purchase price may be subject to CGT at a rate up to 28%.


The gain subject to CGT can be reduced by an annual exemption (currently £12,300 per person), capital losses if available, enhancement expenditure if previously undertaken, or principal private residence relief if the property was the owner’s main place of residence.


Inheritance tax The second consideration is inheritance tax (‘IHT’). Many parents who gift their investment property to their children are doing so for IHT planning reasons.


To take advantage of the IHT rules, the property must be gifted outright with no ‘reservation of benefit’ and the parents must survive at least 7 years from the date of the gift. If these conditions are met, then the gifted property will fall outside of the parent’s estate for IHT purposes, potentially saving IHT at 40% on the value of the property.


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nvariably, investment property owners will at some point consider what to do with the property – sell to a third party and realise


Stamp duty land tax The third consideration is stamp duty land tax (‘SDLT’). The SDLT liability is calculated on the monies given and not on the market value of the property transferred. Therefore, if the transfer is a pure gift with no consideration, no SDLT is payable.


However, this is only the case if there is no outstanding mortgage on the property. If the children take over any part of an existing mortgage, SDLT is payable if the value of the mortgage is over the SDLT threshold. Under the COVID-19 temporary rules in place until 31 March 2021 the threshold amount is £500,000. From 1 April 2021, the threshold amount reduces to £125,000. The SDLT rates above the threshold amount start at 2% and increase to 12% depending on the value of the property.


One downside of parents gifting property to their children is that, should any of their children buy a new home, or sell an existing home and buy a replacement home in the future, they will be subject to the additional 3% SDLT surcharge on the basis that they already own a share of an existing property.


Income tax The fourth consideration is income tax (‘IT’). As investment properties generate rental income, this income is subject to income tax at the taxpayer’s marginal rate of income tax. Therefore, for parents who gift an investment property to their children, their children will become liable to income tax and they will need to


MANY PARENTS WHO GIFT THEIR INVESTMENT PROPERTY TO THEIR CHILDREN ARE DOING SO FOR IHT PLANNING


register with HMRC for preparing and submitting personal tax returns.


Trusts An alternative for parents who are considering gifting their investment property directly to their children is the use of a Trust. The Trust has the benefits of 1) allowing parents to retain control of the investment property for the benefit of their children; and 2) allowing the investment property to be protected from any family breakups the children may unfortunately experience. It is worth noting that the parents cannot benefit from the Trust.


The four tax considerations mentioned above are still in point when using a Trust with different tax outcomes. The use of a Trust can be more complex and these complexities need weighed against the benefits mentioned above.


If there is anything in this article that affects you - or somebody you know - please speak to Steven McVitty for independent professional advice.


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